Finance Bill

Finance Bill - continued	House of Commons
PART III, INCOME TAX AND CORPORATION TAX - continued

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Relief for losses etc

Carry-back of trading losses.

39. - (1) Section 393A of the Taxes Act 1988 (set-off of trading losses against profits of previous three years) shall be amended in accordance with subsections (2) to (6) below.

(2) In subsection (2) (three year carry-back period), for "is the period of three years" there shall be substituted "is (subject to subsection (2A) below) the period of twelve months".

(3) After that subsection there shall be inserted the following subsections-

	"(2A) This section shall have effect in relation to any loss to which this subsection applies as if, in subsection (2) above, the words "three years" were substituted for the words "twelve months".
	(2B) Where a company ceases to carry on a trade at any time, subsection (2A) above applies to the following-
	(a) the whole of any loss incurred in that trade by that company in an accounting period beginning twelve months or less before that time; and
	(b) the part of any loss incurred in that trade by that company in an accounting period ending, but not beginning, in that twelve months which is proportionate to the part of that accounting period falling within that twelve months.
	(2C) Where-
	(a) a loss is incurred by a company in a ring fence trade carried on by that company, and
	(b) the accounting period in which the loss is incurred is an accounting period for which an allowance under section 62A of the 1990 Act (demolition costs relating to offshore machinery or plant) is made to that company,
	subsection (2A) above applies to so much of the amount of that loss not falling within subsection (2B) above as does not exceed the amount of that allowance."

(4) In subsection (7) (application of section 393(9))-

(a) at the beginning there shall be inserted "Subject to subsection (7A) below,"; and

(b) for "the accounting period in which the cessation occurs" there shall be substituted "an accounting period ending with the cessation, or ending at any time in the twelve months immediately preceding the cessation,".

(5) After that subsection there shall be inserted the following subsection-

	"(7A) For the purposes of this section where-
	(a) subsection (7) above has effect for computing the loss for any accounting period, and
	(b) that accounting period is one beginning before the beginning of the twelve months mentioned in that subsection,
	the part of that loss that is not the part falling within subsection (2B)(b) above shall be treated as reduced (without any corresponding increase in the part of the loss that does fall within subsection (2B)(b) above) by an amount equal to so much of the aggregate of the charges on income treated as expenses by virtue of subsection (7) above as is proportionate to the part of the accounting period that does not fall within those twelve months."

(6) After subsection (11) there shall be inserted the following subsection-

"(12) In this section "ring fence trade" has the same meaning as in section 62A of the 1990 Act."

(7) In section 343 of that Act (company reconstructions without a change of ownership), the following subsection shall be inserted after subsection (4)-

"(4A) Subsection (2A) of section 393A shall not apply to any loss which (but for this subsection) would fall within subsection (2B) of that section by virtue of the predecessor's ceasing to carry on the trade, and subsection (7) of that section shall not apply for the computation of any such loss."

(8) Subject to subsection (9) below, this section applies to any loss incurred in an accounting period ending on or after 2nd July 1997.

(9) Where a loss in any trade is incurred by a company in an accounting period ending on or after 2nd July 1997 but beginning before that date, section 393A of the Taxes Act 1988 shall have effect as if subsection (2A) of that section applied to the pre-commencement part of any amount of that loss to which that subsection would not apply apart from this subsection.

(10) In subsection (9) above "the pre-commencement part", in relation to the amount of the whole or any part of a loss in an accounting period, means the part of that amount which, on an apportionment in accordance with subsection (11) or, as the case may be, (12) below, is attributable to the part of that accounting period falling before 2nd July 1997.

(11) Except in a case where subsection (12) below applies, an apportionment for the purposes of subsection (10) above shall be made on a time basis according to the respective lengths of the part of the accounting period falling before 2nd July 1997 and the remainder of that accounting period.

(12) Where the circumstances of a particular case are such that the making of an apportionment on the time basis mentioned in subsection (11) above would work in a manner that would be unjust or unreasonable in relation to any person, the apportionment shall be made instead (to the extent only that is necessary in order to avoid injustice and unreasonableness) in such other manner as may be just and reasonable.

Carry-back of loan relationship deficits.

40. - (1) Chapter II of Part IV of the Finance Act 1996 (loan relationships) shall be amended as follows.

(2) In paragraph 3(7) of Schedule 8 (permitted period of three years for carry-back of deficits), for "three years" and "three year" there shall be substituted, in each case, "twelve months".

(3) In sub-paragraph (3) of paragraph 4 of Schedule 11 (carry-back of deficit by insurance companies)-

(a) for paragraph (a) there shall be substituted the following paragraph-

"(a) carried back to accounting periods falling wholly or partly within the period of twelve months immediately preceding the deficit period; and";

and

(b) in paragraph (b), for "those periods" there shall be substituted "up to three such periods".

(4) In sub-paragraph (5) of that paragraph (mechanism for carry-back in the case of insurance companies), for "the three accounting periods preceding the deficit period" there shall be substituted "accounting periods falling wholly or partly within the period of twelve months mentioned in sub-paragraph (3)(a) above".

(5) In sub-paragraph (8) of that paragraph (which defines the set-off periods), in each of paragraphs (b) and (c), for "immediately preceding" there shall be substituted "(if any) which falls wholly or partly within the period of twelve months mentioned in sub-paragraph (3)(a) above and immediately precedes".

(6) In sub-paragraph (9) of that paragraph (adjusted amount of a company's eligible profit), after "is" there shall be inserted "(subject to sub-paragraph (9A) below)"; and after that sub-paragraph there shall be inserted the following sub-paragraph-

"(9A) Where a set-off period falls only partly within the period of twelve months mentioned in sub-paragraph (3)(a) above, the adjusted amount of a company's eligible profit for that period shall be taken to be confined to the part of the amount computed under sub-paragraph (9) above which is proportionate to the part of the set-off period that falls within that period of twelve months."

(7) Subject to subsection (8) below, this section has effect in relation to any deficit for a deficit period ending on or after 2nd July 1997.

(8) Paragraph 3 of Schedule 8 to the Finance Act 1996 shall have effect in relation to any deficit for a deficit period beginning before but ending on or after 2nd July 1997 as if the permitted period in relation to the pre-commencement part of the deficit were the period beginning with 1st April 1996 and ending immediately before the beginning of the deficit period.

(9) Where for the purposes of paragraph 23 of Schedule 15 to the Finance Act 1996 (transitional provision in connection with the carrying back of exchange losses) there is a relievable amount for an accounting period ending on or after 2nd July 1997, that paragraph shall have effect, except in relation to any pre-commencement part of that amount, as if, in section 131(10)(b) of the Finance Act 1993 (the permitted period) as applied by that paragraph, the words "twelve months" were substituted for the words "three years"

(10) In this section "pre-commencement part", in relation to the deficit for any deficit period or the relievable amount for any accounting period, means the part (if any) of that deficit or relievable amount which, on an apportionment in accordance with subsection (11) or, as the case may be, (12) below, is attributable to such part (if any) of that period as falls before 2nd July 1997.

(11) Except in a case where subsection (12) below applies, an apportionment for the purposes of subsection (10) above shall be made on a time basis according to the respective lengths of the part of the deficit period or, as the case may be, accounting period falling before 2nd July 1997 and the remainder of that period.

Restrictions on group relief.

41. Schedule 7 to this Act (which imposes new restrictions on the giving of group relief) shall have effect.

Capital allowances for small and medium-sized businesses

Temporary first-year allowances.

42. - (1) In subsection (1) of section 22 of the Capital Allowances Act 1990 (first-year allowances), after "40 per cent. of that expenditure" there shall be inserted ", in the case of expenditure to which this section applies by virtue only of subsection (3C) below, shall be of an amount equal to the percentage of that expenditure that is given by subsection (1AA) below".

(2) After that subsection there shall be inserted the following subsection-

	"(1AA) In the case of expenditure to which this section applies by virtue only of subsection (3C) below, the percentage mentioned in subsection (1) above is-
	(a) in the case of expenditure to which Chapter IVA applies, 12 per cent; and
	(b) in the case of any other expenditure, 50 per cent."

(3) After subsection (3B) of that section there shall be inserted the following subsection-

	"(3C) This section applies to-
	(a) any expenditure which, disregarding any effect of section 83(2) on the time at which it is to be treated as incurred, is incurred by a small company or a small business in the period beginning with 2nd July 1997 and ending with 1st July 1998; and
	(b) any additional VAT liability incurred in respect of expenditure to which this section applies by virtue of paragraph (a) above."

(4) In subsection (4) of that section, after "any expenditure" there shall be inserted "to which this section applies otherwise than by virtue only of subsection (3C) above".

(5) After subsection (6A) of that section there shall be inserted the following subsections-

	"(6B) No first-year allowance shall be made in respect of any expenditure to which this section applies by virtue only of subsection (3C) above-
	(a) if the chargeable period related to the incurring of the expenditure is also the chargeable period related to the permanent discontinuance of the trade;
	(b) if the expenditure (whether or not it is expenditure to which Chapter IVA would apply but for the provisions of section 38B) is expenditure of the kind described in any of subsections (2) to (4) of section 38B;
	(c) if the expenditure is expenditure to which Chapter IVA would apply but for the provisions of section 38H;
	(d) if the expenditure is expenditure on the provision of machinery or plant for leasing, whether in the course of a trade or otherwise;
	and section 50(2) shall apply for the interpretation of paragraph (d) above as it applies for the interpretation of Chapter V of this Part.
	(6C) No first-year allowance shall be made in respect of any expenditure incurred on the provision of machinery or plant to which this section applies by virtue only of subsection (3C) above if-
	(a) the provision of the machinery or plant is connected with a change in the nature or conduct of a trade or business carried on by a person other than the person incurring the expenditure; and
	(b) the obtaining of a first-year allowance is the main benefit, or one of the main benefits, which could reasonably be expected to arise from the making of the change."

(6) In sections 23(6), 42(9), 44(5), 46(8), 48(7) and 50(3) and (4A) of that Act (which contain provisions referring to the temporary first-year allowances under section 22(3B) of that Act), after the words "subsection (3B)", in each place where they occur, there shall be inserted the words "or (3C)".

(7) In section 39(2)(a) of that Act (definition of a qualifying purpose), for "subsections (2) to (3B)" there shall be substituted "subsections (2) to (3C)".

(8) In section 43 of that Act (provisions relating to joint lessees in cases involving new expenditure), after subsection (4) there shall be added the following subsection-

"(5) Any first-year allowance made in respect of expenditure to which section 22 applies by virtue only of subsection (3C) of that section shall be made on the same assumptions and subject to the same apportionments (if any) as it appears would, by virtue of subsection (3) above, be applicable in the case of a writing-down allowance."

(9) This section shall have effect in relation to every chargeable period ending on or after 2nd July 1997.

Expenditure of a small company or small business.

43. - (1) After section 22 of the Capital Allowances Act 1990 there shall be inserted the following section-

"Expenditure of a small company or small business.	22A. - (1) For the purposes of section 22 capital expenditure incurred by a company is capital expenditure incurred by a small company if the company-
	(a) qualifies as small or medium-sized in relation to the financial year of the company in which the expenditure is incurred; and
	(b) is not a member of a large group at the time when the expenditure is incurred.
	(2) For the purposes of section 22, capital expenditure is capital expenditure incurred by a small business if-
	(a) it is incurred by a business for the purposes of a trade (the "first trade") carried on by that business; and
	(b) were the first trade carried on by a company (the "hypothetical company") in the circumstances set out in subsection (3) below, that company would qualify as small or medium-sized in relation to the financial year of that company in which the expenditure would be treated as incurred.
	(3) Those circumstances are-
	(a) that every trade, profession or vocation carried on by the business concerned is carried on by the business as a part of the first trade;
	(b) that the financial years of the hypothetical company coincide with the chargeable periods of the business concerned; and
	(c) that accounts of the hypothetical company for any relevant chargeable period were prepared in accordance with the requirements of the Companies Act 1985 as if that period were a financial year of the company.
	(4) Subject to subsection (5) below, a company is a member of a large group at the time when any expenditure is incurred if -
	(a) it is at that time the parent company of a group which does not qualify as small or medium-sized in relation to the financial year of the parent company in which that time falls; or
	(b) it is at that time a subsidiary undertaking in relation to the parent company of such a group.
	(5) If, at the time when any expenditure is incurred by any company any arrangements exist which are such that, had effect been given to them immediately before that time, the company or a successor of the company would, at that time, have been a member of a large group, this section shall have effect as if the company concerned was a member of a large group at that time.
	(6) In this section-
	"arrangements" means arrangements of any kind, whether in writing or not, including arrangements that are not legally enforceable;
	"business" means-
	(a) an individual;
	(b) a partnership of which all the members are individuals;
	(c) a registered friendly society within the meaning of Chapter II of Part XII of the principal Act; or
	(d) a body corporate which is not a company but is within the charge to corporation tax;
	"company" means-
	(a) a company, or an oversea company, within the meaning of the Companies Act 1985; or
	(b) a company, or a Part XXIII company, within the meaning of the Companies (Northern Ireland) Order 1986;
	"financial year", "group", "parent company" and "subsidiary undertaking"-
	(a) except in relation to a company formed and registered in Northern Ireland, have the same meanings as in Part VII of the Companies Act 1985; and
	(b) in relation to a company so formed and registered, have the same meanings as in Part VIII of the Companies (Northern Ireland) Order 1986.
	(7) References in this section, in relation to a company, to its qualifying as small or medium-sized-
	(a) except in the case of a company formed and registered in Northern Ireland, are references to its so qualifying, or being treated as so qualifying, for the purposes of section 247 of the Companies Act 1985; and
	(b) in the case of a company so formed and registered, are references to its so qualifying, or being treated as so qualifying, for the purposes of Article 255 of the Companies (Northern Ireland) Order 1986.
	(8) In relation to a company with respect to which the question arises whether it is or would be a member of a large group, references to a group's qualifying as small or medium-sized-
	(a) except in the case of a company formed and registered in Northern Ireland, are references to its so qualifying, or being treated as so qualifying, for the purposes of section 249 of the Companies Act 1985; and
	(b) in the case of a company so formed and registered, are references to its so qualifying, or being treated as so qualifying, for the purposes of Article 257 of the Companies (Northern Ireland) Order 1986.
	(9) For the purposes of this section a company is the successor of another if-
	(a) it carries on a trade which, in whole or in part, the other company has ceased to carry on; and
	(b) the circumstances are such that section 343 of the principal Act applies in relation to the two companies as the predecessor and the successor within the meaning of that section."

(2) This section shall have effect in relation to every chargeable period ending on or after 2nd July 1997.

Prepared 24 July 1997